Sanctions Challenge U.S. Diesel --- New restrictions on Russian crude and refinery cuts expected to bolster fuel prices

"U.S. fuel markets held steady in December after Western sanctions on Russian crude reshuffled global oil shipments. New restrictions that took effect Sunday could prove more complicated.

The measures, which target most of Russia's refined petroleum products, threaten to take supplies off the market as Russia looks for new trading partners. Any confusion could buoy prices for diesel and other fuels that remain stubbornly high since the sanctions on Kremlin last year.

Wall Street's uncertainty reflects how the West's turn away from Russian energy has made trans-Atlantic markets more intertwined. A supply cut or demand surge in Europe could affect New Englanders burning heating oil in home boilers or diesel-hungry trucking firms hauling freight across the Rocky Mountains.

The fresh sanctions hit a U.S. fuel market that remains tight after prices rocketed last year. Pandemic-era refining cuts have limited production, while winter storms curtailed nationwide output and kept stockpiles far below historical averages. A larger-than-usual schedule of maintenance in the coming months also promises to slow refinery runs.

Wall Street believes Sunday's measures will provide additional momentum for fuel makers' profit margins. That could mean continued pressure on companies such as Ace Trucking Services, which manages a fleet of about 200 semitrailers and is just beginning to recover from surging prices last year.

"We took a big, big hit," said Harvey Kane, operations manager for the Cheyenne, Wyo., firm.

The lead-up to the new Western sanctions has played out differently from previous restrictions. In the months before a price cap on Russian crude and a European Union embargo of seaborne imports in December, buyers on the continent turned elsewhere for oil and traders redirected most Russian shipments to India, China and Turkey.

Before Sunday's price cap and EU ban of most Russian refined fuels, European businesses stocked up on Russian imports. Their bolstered inventories lessen the prospect of an immediate shock to supply.

Analysts expect shipping constraints will curb Russian output, as the country's refiners look to Latin America and elsewhere for new customers. The question for U.S. consumers is, what will happen once European stocks run low.

European companies will likely pay a premium in the coming months to attract supplies from far-off producers, analysts say. Marathon Petroleum Corp. executives told investors last week that they expect to direct some Gulf Coast shipments away from Latin America to northwest Europe.

"We're viewing it as a positive, especially if the cutbacks and sanctions take hold like most people think they will," Rick Hessling, senior vice president of global feedstocks, said on the company's earnings call.

The reshuffling of trade routes could carry the most direct impact on the import-reliant U.S. Northeast, said Richard Joswick, head of global oil analytics at S&P Global Commodity Insights. A 2019 explosion at a Philadelphia refinery took much of the region's fuel-making capacity offline, while federal shipping regulations mean tanker voyages from Texas or Louisiana are prohibitively expensive.

Instead, companies across the East Coast largely depend on fuel sent via pipeline from Houston, as well as foreign shipments shuttled into New York Harbor on vessels the length of football fields. Those buyers of seaborne fuel may soon need to compete more with Europe for fuel carried from the Middle East and India.

"What we're likely to see in the New York area is the wholesale price for products will periodically see these spikes," Mr. Joswick said.

The Northeast saw such a jump last fall, when historically low fuel inventories sparked fears that a tug of war over supplies with Europe could contribute to a winter fuel shortage. Unseasonably warm weather and sputtering crude-oil prices helped U.S. diesel consumers avoid worst-case scenarios, though costs remain high.

According to the Energy Information Administration, the average U.S. price of diesel ran $4.62 a gallon in the week that ended Jan. 30, up 78 cents from a year earlier. On the East Coast, diesel sold for $4.84 on average, a 98-cent annual jump.

Those rates helped push Marathon shares up 85% since the start of 2022, while Valero Energy Corp. surged 75% and Phillips 66 Co. jumped 36%. The refining companies reported a combined 2022 profit of $36.9 billion, a record, according to FactSet." [1]

1. Sanctions Challenge U.S. Diesel --- New restrictions on Russian crude and refinery cuts expected to bolster fuel prices
Uberti, David.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 06 Feb 2023: B.9.